Senators Agree On Plan To Replace Fannie Mae, Freddie Mac

A plan to phase out the government-controlled mortgage giants Fannie Mae and Freddie Mac and instead use mainly private insurers to backstop home loans has advanced in Congress.

The plan by Democratic Sen. Tim Johnson of South Dakota, chairman of the Banking Committee, and Sen. Mike Crapo of Idaho, the committee’s senior Republican, would create a new government insurance fund.

Essentially, investors would pay fees in exchange for insurance on mortgage securities they buy and the government would become a last-resort loan guarantor.

And this week, a bipartisan group of senators is announcing a plan to overhaul the nation's mortgage market by replacing the government-sponsored mortgage giants Fannie Mae and Freddie Mac. Senate Democrat Tim Johnson and Republican Mike Crapo say they will formally unveil more details of the proposal in the coming days, but we do know the broad outlines of the plan. And joining us to tell us about them is NPR's Chris Arnold who covers economics and the housing market. Hi, Chris.

CHRIS ARNOLD, BYLINE: Hey, Jeremy.

HOBSON: Well, what is this plan?

ARNOLD: Right. So, first, we should say that this is really historic and important stuff that millions of dollars flows through these companies, Fannie May and Freddie Mac, and they're crucial to the whole housing system in this country. So that's what we're talking about. And one way that people can wrap their head around this is - let's say that Fannie May and Freddie Mac are houses, and if we say that, it's probably fair to say that they had this serious wiring problem that blew up under the stress of the financial crisis.

So, you know, the lights were gonna go off, so the government stepped in, kept the lights on because they're so important. And to continue the metaphor, this latest proposal from lawmakers says basically, OK, we've made some repairs, we've made some fixes. But now we want to tear down Fannie May and Freddie Mac and just start over.

HOBSON: Start over. So build a better house.

ARNOLD: Correct. What we call a teardown, you know, in the real estate business. So the government is proposing to tear them down. And this, again, would affect millions of people, the vast majority of Americans, because people either own a home in this country or 80-plus percent of them want to own a home someday.

HOBSON: So what would the new house be under this proposal?

ARNOLD: OK. The main benefit the proponents talk about here is that this would protect tax payers in a future housing crash, and that's because it puts private capital at risk ahead of taxpayer money. Right now, Fannie and Freddie guarantee loans if you get a mortgage and you can't pay your mortgage, and the bank is like, uh-oh, Jeremy can't pay his mortgage. The government steps in through Fannie and Freddie ultimately and backstops it.

So going forward, we'd have private money in front, insurance companies, government oversight over a private fund. There'd be a bunch of stuff that's complicated, but the idea is taxpayers would never have to foot that bill.

HOBSON: Well, that sounds like a good idea, Chris. I'm sure a lot of people can get behind that. Although given the sensitivity of this issue, I'm sure there are some people who are not big fans of this idea.

ARNOLD: Right. And the people who are not fans' one big concern is that the new system transfers power and control from government to private financial firms. And we just went through a big mess involving private financial firms. Housing advocates worry. Look, the middle class, moderate income families, they may find it harder and more expensive to get mortgages. And it's not just the housing advocates. Realtor groups - they also have been nervous about this too.

HOBSON: And I guess the big question also is, if something catastrophic were to happen again to the housing market and there is private money at risk, wouldn't the government step in anyway? Even if they say they're not going to, wouldn't they step in to prevent a meltdown like we just saw?

ARNOLD: Of course. I mean, they would have to. You talk about too big to fail. There's - the entire U.S. housing finance system is clearly too big to fail. So it's a question of how much private money you put in front of the ultimate government backstop that has to be there. And you could do that without replacing Fannie and Freddie. There would be other ways to do that.

It's also worth pointing out that in Fannie and Freddie's case, they have now been able to pay back all of the bailout money. This is some $200 billion that they got. So the government's been made whole here under the old existing system.

HOBSON: NPR economics correspondent, Chris Arnold, on this new plan that's being unveiled in the coming days from Senate Democrat Tim Johnson and Republican Mike Crapo to replace Fannie and Freddie. Chris, thanks so much as always.

ARNOLD: You're welcome.

HOBSON: This is HERE AND NOW. Transcript provided by NPR, Copyright NPR.